With the private-placement sales facing intense scrutiny from securities regulators, one due-diligence attorney has fired off a potent missive to Finra officials about clients’ responsibilities when buying the high-risk investments.
In a letter sent last month to James Shorris, Finra's executive director of enforcement, Bryan Mick, president of Mick & Associates PC LLO, said he applauded the
Financial Industry Regulatory Authority’s recent efforts to “lower the boom on shady private placements.”
But Mr. Mick, whose firm has been scrutinizing private offering for eight years, strongly reminded Mr. Shorris that investors share the risks when buying into such deals.
“While customer suitability must remain a primary focus, we perceive that many of these highly sophisticated clients, who are willing to make a higher-risk investment for the potential of high investment returns, are suffering from selective amnesia, and the regulatory agencies are all too eager to be the diagnosing physician,” Mr. Mick said in his letter.
Investor losses in private placements have been highlighted by the implosion last summer of deals for Medical Capital Holdings Inc. and Provident Royalties LLC. Both companies were subsequently socked with fraud charges by the Securities and Exchange Commission.
State securities regulators have also joined the fray. A complaint filed last month by the Massachusetts Securities Division alleges that independent broker-dealer Securities America Inc. failed to reveal pertinent information to investors about high-risk notes issued by Medical Capital.
In December, Mr. Shorris told
InvestmentNews that the industry regulator has “a number of investigations under way involving allegations of wrongdoing arising from the sales of these ‘Reg D' private placements,” adding that Finra expected to bring enforcement cases on private placements in 2010.
“Reg D” refers to the securities regulations that govern the sale of private-placement investments, which generally don't have to be registered with regulators. Typically, Reg D offerings are conducted by smaller companies.
Over the past six months, brokerage executives have routinely said that they are fearful of giving brokers and advisers access to any new private deals in the wake of the Medical Capital and Provident incidents.
In his letter to Mr. Shorris, Mr. Mick compared investors who lose money in private placements to those who lose money in the stock market.
“If an investor bought
Citigroup at $26 and it is now worth $3, the typical reaction is, ‘The bank loaded up on CDOs,' 'Our broker can’t pick bank stocks,' or, 'Management is clueless,’ and the investor takes his lumps,” Mr. Mick wrote. “On the other hand, if the investor loses 80% to 90% or even a fraction of capital in a private placement, the patented approach is, ‘Somebody committed fraud, and I am going to sue them.’”
Mr. Mick also pointed out that the overall economy has taken a bite out of private deals, too. “While we encourage regulatory enforcement against truly fraudulent sponsors, we hope that this enforcement is tempered by recognition of economic conditions that have been identified by many macroeconomists as close to those experienced in the Great Depression."
He noted that in the midst of the economic meltdown, "investors, plaintiff’s counsel and regulators are quick to label ‘frauds’ and ‘Ponzi schemes’ without fully analyzing the definitional element of such labels.”
Finra officials could not comment on the letter, because it relates to Reg D offerings, “the sales of which are the subject of multiple investigations by Finra,” said Herb Perone, a spokesman.
